10/06/2008

'The Credit Crunch' - a waste of the monetary policy?

While mind maps are on their way to full completion (Wednesday hasn't come yet, has it?), I've decided to read some articles about current crisis economics situation also known as 'the credit crunch'.

To my great luck, I've found very interesting and detailed article at economist.com.

It seems that 'the credit crunch' could have been predicted if somebody have looked at the situation carefully - these things, according to the article, were unseen so banks and companies could borrow huge sums of money without even thinking about any possible following problems.

This is a great example of the 'dark side' of monetary policy - not rational use of interest rates has led to worldwide crisis. Monetary policy is fully dependent on the banks. In this particular situation banks are not a tool of fixing economics problems, they are a problem themselves.

Uh, wait, I've forgotten one more thing - If i'm talking about monetary policy and interest rates, I should explain some details.

There are six main types of monetary policy - each is used for it's own target. Types of monetary policy are usually called monetary regimes:

Monetary policy uses different tools, but would they help with 'the credit crunch'? I'm not so sure.

- Monetary base. In the current situation monetary base won't help at all - banks are not controlling the money circulating in the economics anymore.

- Reserve requirements. I can't say anything about this one.. except I don't think that bank are going to reserve any requirements while they are busy with their own problems.

- Discount window lending. Yes-yes-yes, now it happens. The ECB (the European Central Bank), the Bank of England and the Bank of Japan, the Federal Reserve agreed to lend a further $620 billion on September 29th for fixing the crunchy situation in the US. President Bush wanted to give the same amount of money from the budget, but this idea was rejected by the Congress. Maybe it will slower the crisis and some analitics will find a solution before the big default boom.

- Interest rates. Uh, I think that's the thing that is out of any control now.

'The credit crunch' may cause the rise of unemployment rate, which will cause less spending, which means demand will decrease dramatically.

On the other hand, the companies will have less money too. The strongest companies will survive, of course, but it can lead to a monopoly. A monopoly means high prices, no competition and other scary stuff. Supply will decrease.